Wednesday, October 31, 2018

The Sohn San Francisco 2018 Investment Conference recently concluded and featured hedge fund managers sharing their ideas in order to benefit the Excellence in Investing for Children's Causes Foundation and its beneficiaries, as well as The Sohn Conference Foundation and pediatric cancer research.

• Corepoint Lodging (CPLG) – lodging REIT spun off from La Quinta
• Spun off from La Quinta recently so a new company in equity markets
• 315 properties REIT with all La Quinta branded properties and operated by Wyndham
• Some classic dynamics of spin-off at play (Less analyst coverage, noisy financials, atypical shareholder base due to spin)
• Earnings were temporarily depressed and should increase as 1) hotels impacted by hurricanes in Texas and Florida will come back online and contribute to earnings; 2) renovations are completed
• Trading at a discount to peers at 8.3x EV/EBITDA vs median of 10.6x
• Other sources of earnings upside are increased oil and gas activity – have more exposure to oil and gas markets
• Trading at a discount based on hard asset value
• Substantial opportunity to improve hotel level profitability
• If margin improvement doesn’t happen, business likely to be sold (Taxable spin purposefully preserved ability to sell immediately)
• 55% upside based on current price, using 11x multiple and 2019 EBITDA of $232m

• Extended Stay America (STAY) – hotel owner/operator with 599 properties and 27 franchisees
• La Quinta part 2 but at the beginning of the story
• Largest single brand hotel owner and operator in North America
• Longer length of stay, less labor and higher margins versus typical lodging operator
• Company knows current structure is sub-optimal and seems motivated to do something, which could unlock value
• Highest margins relative to peers, strong cashflow profile, positive industry fundamentals, discounted valuation
• Re-franchising less profitable units
• Building new hotels with cash flow
• Last of its kind to separate its hard real estate assets from its brand company
• Capital deployment likely to drive shareholder value: stable cash flow from retained hotels, refranchising less profitable hotels, goes into: repurchasing shares, new hotels, growing franchise business which is minimal cost and high returns
• Attractive valuation: Trading at discount to peers. 8x EBITDA versus peers at an average of 10.7x
• Argues co belongs in a larger portfolio
• 134% upside to $38.12 target price based on 2022E Maintenance FCF/Share of $2.29 and 15x multiple

• There’s been a selloff in the semiconductor industry due to concerns of slowing global growth
• End markets matter when it comes to semiconductor investing
• Marvell operates in strong end markets – data centers and communications infrastructure which both benefit from high growth, average margins, average competition and high secular growth
• Starboard got involved and took a large position; majority of board and senior management replaced. Since then YoY revenue went from -15.4% to up 3%, gross margin improved 800 bps
• Cavium Acquisition has improved their product offering
• Four key reasons to own: Potential upside to estimates, Strong management team, Compelling valuation (thinks stock is a double), Multiple call options
• Networking and storage are the two key end markets that Marvell plays in
• Solid State Drives (SSD) will drive the majority of growth
• Adoption of SSD growing in other areas (e.g. desktop, enterprise)
• HDD – data center growth offsets decline in client use
• Networking: Beginning of a multiyear growth phase for 5G and they have more components in 5G technology than 4G
• Margin expansion opportunity: Gross margin has gone up 800bps, going forward – more opportunity for margin expansion
• Management exceeding expectations and are strong capital allocators
• Despite best of breed margin profile, valuation trading at a significant discount to peers
• Some call options in the business like cross selling and product expansion that can drive additional upside
• Risks? Economic downturn, HDDs decline quicker than expected, Cavium underperformance, 5G spending slows down/delayed. Mitigants: secular trends in end markets, data center growth offsets, strong management, faster ramp in 5g spending
• Current price: $16.5 per share, upside to estimates = $5 per share, multiple expansion = $10 per share, giving price target of $31.5 per share.

• Long Radico Khaitan Ltd. (RDCK-IN), an Indian spirits company with domestic liquor brands

Thesis

• Indian consumer staples have done really well over the last 15 years; +21% IRR
• Per capita consumption of alcohol of 3L per person in India is much lower than the rest of the world and the world average of 6L per person
• Radico has a 7% market share of the Indian branded liquor market
• Really challenging to sell alcohol in India so barriers to entry favor existing players; in many states – distribution owned by the government
• Magic Moments vodka has very strong 50% market share as the #1 in Vodka in India
• Long runway for growth given vodka consumption (vs. other spirits) is underpenetrated versus other markets
• Expect margin expansion to 20% in ~2+ years versus 17.5% this year (More upside given that industry peers Diageo and Pernod have margins of ~30%)
• More recently have launched premium products that compete with products from Pernod and Diageo and have ability to drive further margin expansion
• Have decreased leverage significantly – expect to be at 0.0x by 2019
• Business is very attractively priced (Attractive valuation – 20x forward earnings, rev growth of ~20%; EBITDA growth of ~40%)
• Management owns 40% of the business and has never sold a share

• Complex supply chains and high end brands do not translate well to Amazon’s scale and price driven business mode
• Compared Neiman Marcus's position in the 1990s as category winner to Farfetch as category winner now in the 2000s
• Also compared similarities to Zozotown in Japan, whose gross profit as a % of GMV increased over time and took EBITDA margins from 25% to 35%
• Personal luxury goods market is large and expected to be $450bn TAM by 2025
• Luxury goods are underpenetrated online versus apparel
• Farfetch runs a lot of the ecommerce websites for large luxury brands (e.g. Shopify for luxury)
• Recent margin decline driven by investment in online sizing technology
• Multiple drivers of success: Increasing TAM (3% to 10%), online penetration (9% to 15%), share of online TAM, take rate increase (from 33% to 38%), and margin expansion (from -19% to 35%)
• Attractive repeat customer spending. Initial purchase: $619 on site, in year 5 same customer spent $2,853 annually
• Believes it is a double over next few years

Gil Simon's Sohn San Francisco Presentation: Long New York Times (NYT)

• Conventional views: news is a commodity, consumers won't pay for news, advertising only way to scale
• SoMa's view: consumers aware of 'fake news,' will pay up for trustworthy, differentiated content, most info still free but quality journalism worth paying for, direct subscription model better aligns publishers with consumers. Analogous to music industry streaming shift
• At the very early innings of the evolution of the new business
• Company with legacy, credibility and scale and has been around 170 years
• Believes internet will go from headwind to tailwind for high quality journalism
• 2011 – implemented their first paywall (with 20 stories a month for free)
• Shifting business model to creating journalism worth paying for
• Broadening content to deep research, more multimedia content (The Daily by NYT is one of the top podcasts in the country
• Very few publishers have crossed the chasm to monetizing print newspaper content – only FT, WSJ, Washington Post, and the New York Times
• Recently tighter paywall to 5 free articles per month driving conversion to paid subs
• 70%+ subs are digital subs
• 80% of print subs have a digital login
• See more revenue going towards subscription
• Opportunity for margin expansion from ~12% today to 20% by 2022
• Can’t be viewed as a legacy print media company; Underestimating future earnings leverage based on fixed costs of the newsroom
• Believes that it is a double to $40-$50 in 2 years

• Short Trupanion (TRUP), a pet health insurance company
• An insurance company that is looking for a SAAS-like multiple by using software nomenclature and getting coverage by software analysts

Thesis

• Believes that TRUP is an insurance company masquerading as a subscription software business by using software nomenclature and getting coverage by software analysts
• Gross margins of 17% are nowhere near SAAS companies
• Looks more like standard insurance company with policyholders than a subscription company with subscribers. Company drivers are net premiums earned and losses incurred just like other insurance companies
• Company pays potentially illegal commissions through “rewards program” for veternarians based on referrals/sales and may be under regulatory investigation (although nothing disclosed) - Offering paid trips to vets and money to money to hospitals for policy activations = commissions
• Believe they could have an adverse selection problem as they are distributing/selling primarily through vet hospitals and healthy pets do not visit the vet hospitals
• Believes they are in an Inevitable Rate spiral which will result in a death spiral - Premiums have to be increased to offset higher claims and thus healthier pets unlikely to be signed up
• Valuation: Trades at a 9x P/B – way higher than best in class insurance peers like Progressive which trades at 3.6x P/B; Believes intrinsic value is $7.05-10.60 representing 65% to 77% downside

• Portfolio has transformed dramatically with spin off of lower margin lighting business and sale of TV/electronics businesses (Went from a diversified conglomerate to a healthcare and personal care company but market still not viewing the company with the right lens)
• Attractive secular growth ( End markets growth at 7%, have #1 or #2 share in their major categories)
• Significant margin improvement opportunity (Diagnostic imaging is primarily where their margins lag and ability to increase their margin here; See 600 bps of margin improvement potential across the segments of the company; Management contemplating 100bps/year of expansion from 2017-2020)
• Management has delivered hitting organic growth targets of 4-6% and 100 bps margin expansion over the last year
• Attractive valuation: Trading at 9.2x EV/EBITDA - lower than peers
• Some optionality in other part of the business
• Strong balance sheet provides a nice margin of safety

• Leading vendor of talent management software
• Operational changes as a result of private equity involvement ($300 million from Silver Lake in 11/17) at Cornerstone will lead to a meaningful inflection in cash flow growth while also positioning the company for a potential sale to a strategic acquirer
• Leading position in the talent management space
• Cornerstone has salesforce efficiency levels well below industry peers, almost 50% lower
• Constructive engagement with management to drive changes in composition of board and management
• 95% renewal rates, should generate strong recurring revenue and cashflow; more than 3,300 customers with 37 million users
• Positioned to be acquired by a strategic but have not been acquired yet because strategics don’t want to do the work to transform the business
• $90/share potential value versus ~$48 share price today

Co-CIO, Systematic Active Equity at BlackRock. Talked about China capital markets more generally. China is second largest equity market in the world (after US). It is very liquid but a lot more retail investors versus more developed equity markets. ~85% of trading volume comes from retail investors.

China equity markets are opening up to a broader investor base given MSCI decision to include Chinese companies.

Bullish on crypto-currencies and blockchain technology. Believes that blockchain is going to do to finance what VOIP did to telephone monopolies. It’s not only about blockchain and payments but decentralized applications will disrupt many different industries.

Discussed newer stable coins, which are low volatility cryptocurrencies (pegged to USD or similar) that are important for the use of applications requiring consistent and stable value exchange.

Recommends buying a basket of currencies – some will be losers and some will be winners- but asymmetric upside will help the winners outperform the losers.

• Pitched long Talend (TLND) which helps companies integrate and manage data from disparate sources and across a wide variety of environment
• Leading platform that is in the perfect spot to help companies manage data explosion

• Pitched long Pure Cycle (PCYO), which is an asset-rich, vertically integrated, emerging water utility located in the Denver, CO metro area
• 3 components of the business: 25k acre feet of water, 930 acre zoned master plan community and also selling water for hydraulic fracking and oil and gas royalties

Thesis

• Believes that there is tremendous underlying value in the company’s three businesses/assets that is not recognized by the market given that the company is underfollowed and underappreciated (and not represented in ETFs)
• Value of 25k-acre feet of water = ~$1.6Bn+ based on water connection fees and service fees
• Residential land value = ~$420mm+. Net cash of $20m
• Water for oil and gas fracking = free call option; currently selling water for $100k-200k per well
• Market Cap = $219M versus a total un-discounted value of $2.0Bn+

Presentation called “Volatility Exposure without the burn”. Talked about ServiceNow (NOW) long converts and short stock as a way to play the volatility trade. Focused on in-the-money converts versus in-the-money LEAPs. Said it's cheap because big funds are selling to small arbs.

Economic risk globally begins rising, political/geo-political risk
continues to increase. Earnings and momentum strong but being adjusted
lower. Correlations across strategies at all time highs.

Talked about ideas to invest in a rising interest rate and yield environment. Winners in a steepening yield curve environment include banks and financials, small caps with low financial leverage, quality, Two year Treasuries. Generally likes to be long volatility, especially in interest rates.

Losers in a steepening yield curve environment include bond proxies, tech, anyone with excessive financial leverage, low quality and any long duration asset.

Monday, October 29, 2018

The 2018 Capitalize For Kids investment conference recently took place and featured top investment managers sharing their latest investment ideas to benefit childrens' mental health. To date, they've raised over $5 million for their beneficiaries. Click each link below to go to that speaker's presentation.

• Presentation title - “Outlook and Investment Strategy”
• Look back over the past decade and present - distill to cash flows and discount rates = prices and returns
• Beneath that is money and credit flows, which determine discount rates
• These are below the surface primitives that drive the headlines
• 10 years ago high risk premiums, today low risk premiums. These have driven returns
• Transitioned from long period of monetary easing to tightened
• Flow of global money and credit is gradually rolling over
• The pace of monetary tightening is moderate, mostly driven by the Fed via roll down and short rate, with impacts on USD
• While unusual for this stage of the cycle, the global financial system is not over leveraged and is supporting growth. Typically expansion financed by leverage, but this expansion financed by money, not credit, as consumers have de-levered, banks financed by core deposits, banks are lending. Capital Markets seeing low credit spreads, no credit sell off despite stock market pullback. Money pull back, but economic growth is still booming, pushing up cash flows. Strong year on earnings still. When does monetary tightening impact credit, then we have impact on economy and earnings.
• First stage of correction / recession is just a monetary pullback, but if credit and risk premiums are affected —> earnings and economic impact which leads to a recession
• China policy is now of comparable importance as the US and Europe. As China’s labour gets more expensive, we see outsourcing of labour to adjacent countries, which is becoming an independent Asian economic bloc. China + Asian 8 country bloc roughly has a GDP of Europe or USA.
• Expected returns of assets are low and the next downturn present unique risks
• Pullback of liquidity is listing the yields of all assets,
• First time since 90’s we have seen real monetary tightening
• A chart with asset returns at different stages of the cycle
o Late cycle, monetary tightening, shows everything suffers except commodities
o Early and Mid cycle, traditional assets perform well.
• Thinks we are approaching the later end of the cycle where inflation accelerates and commodities will benefit

• Unique Risks in the next downturn
o Central banks ability to reverse the downturn is more limited - need 500bps rate cut to turnaround, QE mostly spent
o Political divisions will impact effective policy action
o Deflation with interest rates near zero can trigger a self reinforcing rise in real interest rates and rising risk premiums
o Lots of obligations out there to be kept - pensions obligations, etc
• Look east

• Asia bloc taking share of global output very quickly. Increasingly independent of the issues of the west, driven by Chinese policy, which leads to independence from west. So adds portfolio diverification due to independence of economic returns. 1 year growth of GDP > Mexico GDP, 5 year > Japan, 10 year > Europe
• Balance a strategic mix, go to the beach, earn the risk premium, and diversify asset classes and macro exposures. Balance the risk allocation to growth and inflation, so when economy goes up or down, inflation goes up or down, still earn risk premium
• 50-60 long bonds, 20 equities, 10 energy equities, 10 gold equities. 7% a year since 2000, 10% since 1970. Diversify, balance exposure to growth and inflation. Not exposed to sustained inflationary or economic situation if you listen to that.

• “The Utility of the Future”
• Talking about the ValueAct Spring Fund
• Stakeholder capitalism will be the de jeur over the next 20 years
• Thus the spring fund, making companies more sustainable - invest more, go faster, be a leader, solve the problem (climate change, education, etc.)

• Hawaiian Electric - Biggest and newest investment in the spring fund
• “The resilient and growing platform that enables clean energy production and electrification of transportation to decarbonize Hawaii faster”
• Hawaii is largely an oil burner for electricity generation. 50% of US’s oil burned for power in HE. Particularly since they have tons of renewable areas
• Renewables are much more expensive since their diesel is particularly expensive
• Intermittency is the issue
• Batteries are so good that you will never need a gas peaking plant again
• Can generate 6.5bn in savings throughout the whole state which can be passed to ratepayers, state and shareholders
o Study has aggressive assumptions w.r.t rooftop solar
o Also requires a smart grid.
o Legislature and governor are buying and they are pushing them
o PUC is decoupling earnings from electron generation
• Kauai buying renewable, 70% renewables by 2019
• Off fossil fuel
• Better and less volatile rates
• Public health benefits
• Climate change mitigation
• Lower Cost of ownership for EVs
• Grid resilience
• Reduced habitat conflict and land required
• You can give lifetime free day transportation to prevent grid overloading
• 7% -> 9-10%, bank will fund rooftop solar and charging stations in MFH housing
• Terrible efficiency ratio
• This creates value for all players
• Multi-constituent environment
• Moving Hawaii into leader status
• Financial status - levers for traditional return
• Can become a growth vehicle vs dividend clipper as it has more avenues for growth

• Bring back legendary CEO Chuck Bunch
• Best CEO in coatings, never sold his stock, wants to return
• Had 40 year career at PPG. Large growth in North American Architectural. Needs Capital and Attention
• Wants it to be spun off
• Add leverage to business
• Improve Governance
• Chuck had outperformed peers by 4,700bps over tenure

Jeff Smith's Capitalize For Kids Presentation: Long Marvell Technology Group

• Semi co. Acquired Cavium in July 2018
• Half their biz in storage, half in networking
• Both are growing, both are well positioned
• #1, or #2 in almost every key market
• What SB has done with Marvell
• 114% underperformance vs peers over 5 years pre-SB
• Options backdating, 8 CFOs 8 years. Accounting investigation, auditor resignation
• Loved the business was great, Marvell’s customers wanted them to succeed
• Entire board and management changed since 2016. Just a settlement, not a proxy. More than half the board replaced via settlement, rest turned over after
• New management and CFO
• Revenue shrunk, now its growing
• Gross margins shrunk, now record highs
• Op margins shrunk dramatically, now op margins at record highs
• Stock has 2x’d since first 13D filing
• Only partially closed underinvestment gap, still below index returns, gap is widening in underperformance
• Why now? The acquisition positions it well for 5G and internet megatrend.
• Now has complete solution in enterprise Cloud data centre and service provider. Now Marvell can compete with Broadcom, who was the only complete solution. Customers want them to compete and be strong against Broadcom
• Trades below unaffected deal price

• Not included in LT Financial Model
o Not included 5G, Revenue synergies on deal, or ARM server processors. So not accounting for the revenue growth for the above
o However, they are accounting for all the costs

• Thinks management is credible, killed their guidance. Implying that they sandbag guidance very hard.
• Goes through earnings guidance and earnings and were all big beats
• R&D is higher than their peers. Still thinks it is a solid investment in product that will payoff
• Put managers in place, thinks they are making very responsible investments, that should allow them to continue to beat earnings

• Either get that revenue, or those R&D costs will come out.
o —> earnings $2+/shr. 8x earnings today
o Trades dramatically below their peers on most metrics.
• Company in the market buying stock, $1b+ buyback program
• Still excited about this idea

• Digitization is the megatrend —> conversion of information into data
• Identified drivers
o Devices
o # of sensors / devices
o Connections between sensors and Devices
• She has a chart of # of yottabytes generated annually
o Conservative estimate of their estimate - 2028 1 yottabyte a year in data
o Mostly unstructured data
• Have to be able to derive insights from the data
• Businesses are truly aware of the opportunity
o And counted the number of times data and ML/AI are mentioned
o Data being mentioned frequently and growingo AI less frequently, but growing fast too
o Google mentions AI/ML 50% more than the #2. On average every 6 minutes

• MongoDB hits the full stack
• Contrasts relational to MongoDB
o Relational 1979 - rows and columns. Structured data, and on premise
o MongoDB 2009 - All data, Petabytes scaling easy, in the cloud
• 3 Criteriao Market
• $68bn by 2025 - $28bn is unstructured data
o Leadership
• MongoDB is the leader in non-relational DB, with 40% share, and not tied to a given vendor
• Star ratings on Github repos, and Mongo DBs are killing it. Much more than any other solution out thereo Execution
• CEO and CTO are studs
• CEO - Dev Ittycheria - Entrepreneur BladeLogic, BMC, and then invested at Greylock
• He made a big bet on the cloud that paid off
• Professionalized the GTM and has done very well
• CTO Brain of MongoDB
• Brings them to feature parity with relational DBs + their benefits on top
• $8bn+ revenue annually in 2025 at 20% op margins then. Still 10xer over that period.
• $120 NTM price target, 40% growing over the NTM

• Markets less efficient than ever - main theme
• ETFs today 10% of the market
• ETFs and high yield all driven by flows
o Leads to interesting decoupling in the market`
• John: ETF Creation - buys the biggest issuer of debt, not the largest market cap. Not a function of who is the most solvent. Buy a unit of risk in the co with the most debt outstanding.
• When there are outflows, could be very violent moves
• Tesla - Disconnect between equity and debt
o Historically over 30 years - 88% correlation between Russell 2000 and HYG
o HYG unchanged last 30 days, Russell down 30%

• Growth in insurance cos crazy
o To make money, must get a very large Triple B portfolio optimal portfolio
o Lots of the growth in assets around there because of it
o 10-20% of triple B. —> HY during a down cycle. What does that impact HY?
• Central banks pulling out lots of liquidity in the next 18 months
o real delta into short rates globally
o EU bonds swapped into dollars is 300+bps positive spread
• ECB causing serious distortions in EU credit market

• Steinhoff
o Filed for bankruptcy
o No entities in Germany originally.
• Incorporated an entity because of IG rating
• Issued bonds in Germany
• 1.85% yield
• Much of it was placed with ECB at par
• 6 mos later at 40c on the dollar
• ECB set to be largest HY manager in EU.
o Distorted market, now exited market and lots of issues with defaults and downgrades now
• Active management will need to be really important for the next 5 years because of these risks to serious dislocations
• Could lead to massive repricing’s in the FI market

• J Crew
o Took IP away from lenders and raised money on it
o Covenants and document ignorance are killing lenders due to scummy sponsors
• All metrics on covenants worse than 2007. Investors need bonds so they just take it
• Covenants matter only at most importance time (recession), so there is a non-linear negative impact

• G4S
o One of the big security contractors. For corps, embassies, airports
o 3-5 year contracts, price escalators
o Tech components, camera, software, etc which is higher margin
o 9.3x PE
o Target Price £3.9, 85% upside
o #1 or #2 player in cash delivery solutions (think Brinks truck)
o They have a contract with WMT for cash close that saves them two days from cash close at store level to delivering to bank acct at head office
• Target also starting a pilot
o Grow 360 cash biz then take it public at scale at high multiple
o High quality business

• What is it?
o Hard to tell, reporting on segments changed 3 times last 3 years. Trying to hide core of biz. Change revenue segments
• Asturios has their own revenue segment mix that they have estimated. 62% of revenue in Copper Cabling and Connectors. These are the guys who make the “cords” in cord cutting.
• Copper competitive mix vs. fibre, 5G / Wi-Fi, awful, on other side of all trends
• ATT CEO on Apr-17 - 5G quote on replacing copper connectivity
• CEO VZ Dec-17 - Copper cos will see a secular decline, just can’t deliver the functionality
• CFO Commscope Aug-17 - Copper side of market is a non-growth biz
• Cost of copper vs fibre - Fibre costs down 19% over 15 years - Copper cost has 114% over that time period.

Deceptive Accounting

• “Adjusted” NI vs FCF – serious discrepancies
• FCF down significantly, but adjusted NI curiously stable.
• Working capital and restructuring killing the FCF
• Rising inventory days and DSO. Inventory on shelves and financing sales
• Big jump in 1 time restructuring costs
• Snell Acquisition - Q1 2018 acquisition in the UK. No press release.
o Only mention buried on the 82nd of 10-K. Helped them beat the quarter.
o Who is Snell? Shrinking revs
o Down from 105mm -> 80mm over last 5 years. No 2017 revs. They guide it up to $115mm of revenue post acquisition in 2018.

• L/S in Toronto. 9.2% net for 19 years
• Attractive businesses today – as seen by the what the multiple market is paying for them
o Infrao Database / storage
o Land / Real estate
o Tech
• Recurring revs, pricing power, high margin structure, etc
• Similar characteristics, less well know
• Land registry has those characteristics
• Information Services Corporation
o Saskatchewan land and corporate registry services
• 45% upside over next 1-3 year
• Monopoly position in its core registry business
• Undervalued, underfollowed, housing worries
• Can grow + M&A opportunities
• Good biz, cheap asset, growth = asymmetric
• 7.7% FCF yield• Registry ops 54% revs
o 15 years left on MSA w/ SK governmento Monopoly on this biz. Can use and resell data later
o 0.3% of all real estate transactions in Saskatchewan
• Services 33% revs
o Distribution of public records and data
o Growing thru acquisitions
• Tech solutions 13% revs
o Bought a product they used a ton and liked

Secular trends
Under levered, cheap multiple
Core registry is infra structure like asset
High quality biz
Underfollowed
Valuation is great
Providing backend tech to Nova Scotia, wins in Arkansas and Ohio to provide their service.
Teranet at 10.2x EBITDA in 2008. Had 10 years remaining on their contract.
At least 45% undervalued

• “Disruption Trap or Contrarian Value?”
• Thinks tech disruption of a theme is too far, too fast
• Mentions the Gartner Hype cycle and thinks the expectations are too high for this company.
• Some do get disrupted, many don’t. Thinks more companies are victims than would be true. Reminds her of the wake of dot-com bubble where there were good opportunities
• Factfulness is a great book that she thinks is relevant for this situation and it goes over human errors and emotions. More negative and fearful than one needs to be.
• Lots of quotes of historical misjudgements of future trends. “You’ll never make money on the internet” Bill gates to Steve jobs in 1995. This is one of the quotes she shared on it
• Humans are clearly not great at extrapolating tech disruption

• The Stock
o Is cheap - 8.6 PE
o P / CF is 8.3x
o 37% below 52 Week high
o 48% ATH, Low financial risk - Net debt to equity is .43
o Interest coverage is 25x times
o 2.3x debt re-payability
o Solid profits and earnings, high ROIC, ROE >20%, Growing EPS will continue to grow
o Should trade at a premium multiple.
o Insiders been buying YTD, no sales. Buying accelerated. Company plans to increase share repurchases
o CI Financial
o Unlikely supporter as they used to be a big subadvisor in 2006. 90% of revenue at the time. Shows some articles about the squabble
o Amazing sales machine and cost control and great serial acquirers. Watched spectrum united deal after it closed. Took out most of its costs.
o Just bought Sentry and cut cost there too.
o Skillful, aggressive capital allocators. One of the firsts into the “income trust” game

• Why has it fallen?
o Dividend cut
• Typically shows weakness in ops
• But they chose that they’d rather buy back stock as its accretive. Don’t want to be constrained by dividend payments when they can buy back shares or make acquisitions
• This is the market taking the wrong signal from this action.
o Negative perception of fund management
• Regulatory pressure
• Fee pressure
• Redemptions
• Lower fee substitutes
• Secular vs. cyclical pressure on returns
• Over done?

• Suggests active management death debate is overblown
• Still has profit margins >30%
• Despite fee pressure of -3-4% per year
• Can balance the fee pressure with synergies from acquisitions, cost control thru tech
• Indications that alts which have not out performed S&P500 last decade may stop taking asset flows
o Maybe peaked due to capacity constraints
• Largest independent fund manager in Canada
• Believe at $19 is a contrarian value buy
• Worth $32, 68% upside
• In Jan, was as cheap as $30
• Potential takeover target - as it has significant scale in Canada and would be attractive to global player looking to make headway in the market

• TELL - LNG project. Large scale LNG development. US oversupplied. One of few pure-play LNG developers. 25% near term uplift 12 mo
• Long term, stock has 4-9x potential
• Full alignment w/ management and key stakeholders
• Reviews how what used to be a group of regional gas markets with large price discrepancies is now becoming a global market.
• Global demand is growing quite fast.
• Clean, reliable and affordable solution for energy
• Historically LNG for supermajors, Cheniere has changed that
• Founders of Cheniere are founders of TELL. They have 20 year take or pays
• LNG today: developed by Supermajor and JV partners that are buyers
• Tellurian is building an integrated model where their equity partners are their customers
• removes the 3 risk
o Gas Supply - Own 15Tcf in resource for $1bn
o Gas Transport Midstream pipeline
o Gas Liquefaction - Bechtel contract

Management is making “Cheniere 2.0” with a twist. Tellurian becomes the GP of the project where they get management fee ($100mm / year) + promote on 28-42% of LNG volumes. Partners commit entry price + fixed price.

Who are equity partners and who would pay the fees? Tellurian generates a ton of fees, but is the 2nd cheapest LNG project global, still gives a very high, unlevered, double digit returns as equity partners. Total, a 19% shareholder sees value. No firm partners yet, but plenty in the data-room

• Franchise business (owned IP) – 52% of sales [above average operating margins]
• Partner business (licenced IP) – 31% of sales [below average operating margins]
• Gaming business– 17% of sales [above average operating margins]
• High quality, global business, 18x forward PE, high ROIC, stable operating margins over cycleShareholder friendly with 5% shareholder yield (dividend + buyback)
• 90% of toy sales oriented to recurring events (birthdays, holidays, etc) providing stability
• Analog toys and games growth has accelerated since smartphones have been introduced
• Have been able to adapt to digital disruption by leveraging their unique IP that are currently monetized in Franchise business by selling toys. Magic the Gathering game in Open beta, have been experimenting and tweaking game for a long time. Very famous and popular analog game franchise and has significant potential to make money if the game is well designed.
• Dealing with Toys R Us overhang which should be resolved by EOY18x 7 year median earnings multiple for toys business
• 2x digital premium for gaming assets, as digital peers at 23x earnings
• $6 estimated 2020 EPS
• $120 share price, 50% upside

• Many successful consumer turnarounds – LULU, Nike, Adidas, Puma
• New management not “growth at all costs” ROIC, gross margin oriented
• Extremely high short interest
• Cheap if you look forward 3 years, put normalized EBIT margin (9%) and historical earnings multiple (30x)
• UA overbuilt opex and inventory to prep for $10bn in sales, Sports Authority went bankrupt and didn’t downsize fast enough. Tried to grow into it
• Liquidating excess inventory, beating 2018 guidance. Has a large markdown reserve account ($144mm) which once released is ~2018 EBITDA.
• Another $80mm in gross cost savings announced, unclear if it will be used to reinvest in business

• VAC’s performance has been terrible this year, driven by
o Concerns that consumer spending has peaked
o Quarate retail selling its large stake in VAC
o Management focused on integration
o Yet to report its first Clean Quarter post deal close
o $1bn+ in FCF in 2 years on 6bn EV

• Air Canada
o People think it will get “Aimia’d” by Air Canada
o Jazz and Aimia spun out in 2006 From Air Canada
o Had contracts in place above market fees to maximize value from IPO to Air Canada
o 2015 - Amend and Extend agreement
• Reductions in markups + more capex
• Less than $20mm reduction due to leasing provision where Q400 is leased to AC and its earnings making up the difference
o Jazz existing separate from Air Canada is beneficial to Air Canada for cost management purposes.
o Jazz is 45% of AC’s flights, 25% of all passengers
o Strong market position due to this benefit for labour, and few regional competitors having any overlapping routes

• Leasing in general
o Tax benefits
o Capital benefits
o Regional 20% leased vs 40% leased more generally
o Was due to government support to regional carriers which are no longer here
o Chorus already 3rd largest regional lease provider
• Thinks they can take share
• Many PE backed w/ lim. Life funds, will be sellers of their biz over time
o Their competitive advantage is due to being an operator of aircraft
• $10 target, 45% upside, 7% dividend to wait
o Equity growth from capital reinvestment
o Contract flying biz over 7 years generates entire market cap in cash

Defensible market – EXPE tried to grow their hostel business and failed

Opportunity to grow commission rates in line with Booking

Incremental contribution margin for Hostel operators 70%+, so they can take the rate increaseApp is successful driving engagement, which is reducing dependence on Google, increasing their EBITDA margin over time

9x FCF

Cheap because:

Worries around economic growth (despite being hostels being the lowest cost means of travel)

Revenue slowing and EBITDA falling [this is due to new cancellation policy impacting revenue recognition (but not cash flow), making income statement ugly]

Significant redemptions from their largest shareholder Woodford, leading to price pressure

• Premium outperforming mass in beer industry
• Craft beer volumes crushing it, taking share
• Not dissimilar
• Muskoka Brewery - small, but 200 across the country all taking share from Labatt
• Labatt would buy them, but lose their soul when they become big co. Share gaining would stop
• Hemplers —> Oscar Meyer is similar analogy. Hemplers only in Pacific North West
• Hard to compete with the local, and story behind the co
• First biz in PBH is speciality foods 80% of EBITDA, 20% is food distribution

• Hemplers is 1 of 40 brands owned by PBH
o Only buys a biz where the manager wants to stay
o Focused on high regional market share, not high national market share
o #1 in Canada in beef jerky + pepperoni stickso #2 in jerky in US with Oberto acquisition
o Taking expertise from other businesses and advising acquired businesses. Sharing best practices. Taking certain products from one brand and bringing them to another in another region
o Most SBUX breakfast sandwiches made by PBH

• Food Service business
o premium and customized cuts of meat and seafood
o High-end restaurants, local butcher shops
o Focused on “centre of plate” Fish, Steak, Seafood
o Supply The Keg with steaks across Canada

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